15th Mar 2007 07:03
Prudential PLC15 March 2007 PART 2 PRUDENTIAL PLC 2006 PRELIMINARY ANNOUNCEMENT RESULTS SUMMARY European Embedded Value (EEV) Basis Results* 2006 2005 £m £m UK Insurance Operations 686 426M&G 204 163Egg (145) 44 UK Operations 745 633US Operations 718 755Asian Operations 864 568Other Income and Expenditure (298) (244)UK restructuring costs (53) - Operating profit from continuing operations based on longer-term investment returns 1,976 1,712Goodwill impairment charge (120) - Short-term fluctuations in investment returns 745 1,068 Mark to market value movements on core borrowings 85 (67)Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes 207 (47) Effect of changes in economic assumptions and time value of cost of options and guarantees 59 (302) Profit from continuing operations before tax 3,072 2,244 Operating earnings per share from continuing operations after related tax and minority interests* 57.6p 56.6p Basic earnings per share 91.7p 66.9pShareholders' funds, excluding minority interests £11.9bn £10.3bn International Financial Reporting Standard (IFRS) Basis Results* Statutory IFRS basis results 2006 2005 Profit after tax attributable to equity holders of the Company £874m £748mBasic earnings per share 36.2p 31.6pShareholders' funds, excluding minority interests £5.5bn £5.2bn Supplementary IFRS basis information Operating profit from continuing operations based on longer-term investment returns £893m £957mOperating earnings per share from continuing operations after related tax and minority interests* 26.4p 32.2p 2006 2005Dividends per share declared and paid in reporting period 16.44p 15.95p Dividends per share relating to reporting period 17.14p 16.32p Funds under management £251bn £234bn *Basis of preparation The EEV basis results have been prepared in accordance with the EuropeanEmbedded Value Principles issued by the CFO Forum of European InsuranceCompanies in May 2004 and expanded by the Additional Guidance on EEV disclosurespublished in October 2005. The basis of preparation of statutory IFRS basisresults and supplementary IFRS basis information is consistent with that appliedfor the 2005 full year results and financial statements. Consistent with previous reporting practice, the Group analyses its EEV basisresults and provides supplementary analysis of IFRS profit before taxattributable to shareholders, so as to distinguish operating profit based onlonger-term investment returns from other constituent elements of total profit.On both the EEV and IFRS bases, operating earnings per share are calculatedusing operating profits from continuing operations based on longer-terminvestment returns, after tax and minority interests. These profits excludegoodwill impairment charges, short-term fluctuations in investment returns andthe shareholders' share of actuarial and other gains and losses on definedbenefit pension schemes. Under the EEV basis, where additional profit and losseffects arise, operating profit based on longer-term investment returns alsoexcludes the mark to market value movements on core borrowings and the effect ofchanges in economic assumptions and changes in the time value of cost of optionsand guarantees arising from changes in economic factors. After adjusting forrelated tax and minority interests, the amounts for these items are included inthe calculation of basic earnings per share. EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS SUMMARY CONSOLIDATED INCOME STATEMENT 2006 2005 £m £m UK Insurance Operations 686 426 M&G 204 163 Egg (145) 44 UK Operations 745 633 US Operations 718 755 Asian Operations 864 568 Other Income and Expenditure (298) (244)UK restructuring costs (53) - Operating profit from continuing operations based on longer-term investment returns 1,976 1,712Goodwill impairment charge (120) -Short-term fluctuations in investment returns 745 1,068Mark to market value movements on core borrowings 85 (67)Shareholders' share of actuarial and other gains and losses on defined benefit pension 207 (47)schemesEffect of changes in economic assumptions and time value of cost of options and guarantees 59 (302)Profit from continuing operations before tax (including actual investment returns) 3,072 2,244 Tax (859) (653) Profit from continuing operations for the financial year after tax before minority interests 2,213 1,591 Discontinued operations (net of tax) - 3 Profit for the year 2,213 1,594 Attributable to:Equity holders of the Company 2,212 1,582 Minority interests 1 12 Profit for the year 2,213 1,594 Earnings per share (in pence) 2006 2005 From operating profit, based on longer-term investment returns, after related tax and minority interests 57.6p 56.6pAdjustment for goodwill impairment charge - (5.1)pAdjustment from post-tax longer-term investment returns to post-tax actual investment returns (after related minority interests) 22.0p 30.6pAdjustment for mark to market value movements on core borrowings 3.5p (2.8)pAdjustment for post-tax shareholders' share of actuarial and other gains and losses on defined benefit pension schemes 6.0p (1.4)pAdjustment for post-tax effect of changes in economic assumptions and time value of cost of options and guarantees 2.6p (11.1)p Based on profit from continuing operations after minority interests 91.7p 66.8p Based on profit from discontinued operations after minority interests - 0.1p Based on profit for the year after minority interests 91.7p 66.9p Average number of shares (millions) 2,413 2,365 Dividends per share ( in pence) 2006 2005Dividends relating to reporting period:Interim dividend (2006 and 2005) 5.42p 5.30pFinal dividend (2006 and 2005) 11.72p 11.02p Total 17.14p 16.32p Dividends declared and paid in reporting period:Current year interim dividend 5.42p 5.30pFinal dividend for prior year 11.02p 10.65p Total 16.44p 15.95p TOTAL INSURANCE AND INVESTMENT PRODUCTS NEW BUSINESS INSURANCE PRODUCTS AND INVESTMENT PRODUCTS* Insurance Products* Investment Products* Total 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m UK Operations 7,192 7,193 13,486 7,916 20,678 15,109US Operations 5,981 5,023 - - 5,981 5,023Asian Operations 1,921 1,485 20,408 18,457 22,329 19,942 Group Total 15,094 13,701 33,894 26,373 48,988 40,074 INSURANCE PRODUCTS - NEW BUSINESS PREMIUMS AND CONTRIBUTIONS* Single Regular Annual Premium Present Value of and Contribution New Business Equivalents Premiums 2006 £m 2005 £m 2006 £m 2005 £m 2006 £m 2005 £m 2006 £m 2005 £mUK Insurance OperationsDirect to customerIndividual annuities 816 720 - - 82 72 816 720Individual pensions and life 60 29 9 11 15 14 99 70Department of Work and Pensions rebate 161 244 - - 16 24 161 244business Total 1,037 993 9 11 113 110 1,076 1,034 Business to BusinessCorporate pensions 536 242 162 146 216 170 1,071 772Individual annuities 264 212 - - 26 21 264 212Bulk annuities 85 511 - - 8 51 85 511 Total 885 965 162 146 250 242 1,420 1,495 Intermediated distribution*Life 961 1,112 5 6 101 118 995 1,149Individual annuities 919 995 - - 92 100 919 995Individual and corporate pensions 130 108 22 25 35 36 228 195 Total 2,010 2,215 27 31 228 254 2,142 2,339 PartnershipsLife 840 814 3 3 87 84 855 835Individual and bulk annuitiesBulk annuity reinsurance from the Scottish 560 - - - 56 - 560 -Amicable Insurance Fund*Individual and other bulk annuities 1,500 1,814 - 150 182 1,500 1,814 -Total 2,900 2,628 3 3 293 266 2,915 2,649 EuropeLife 159 201 - - 16 20 159 201Total UK Insurance Operations 6,991 7,002 201 191 900 892 7,712 7,718US OperationsFixed annuities 688 788 - - 69 79 688 788Fixed index annuities 554 616 - - 55 62 554 616Variable annuities 3,819 2,605 - - 382 261 3,819 2,605Life 8 11 17 14 18 15 147 137Guaranteed Investment Contracts 458 355 - - 46 35 458 355GIC - Medium Term Notes 437 634 - 44 63 437 634 -Total US Operations 5,964 5,009 17 14 614 515 6,103 5,135 Asian OperationsChina 27 17 36 23 39 25 198 144Hong Kong 355 289 103 83 139 112 933 741India (Group's 26% interest) 20 4 105 57 107 57 411 215Indonesia 31 42 71 42 74 46 269 186Japan 68 30 7 4 14 7 97 50Korea 103 29 208 132 218 135 1,130 578Malaysia 4 9 72 66 72 67 418 383Singapore 357 284 72 58 108 86 803 704Taiwan 92 124 139 150 148 162 743 912Other 15 9 36 33 37 34 130 126 Total Asian Operations 1,072 837 849 648 956 731 5,132 4,039 Group Total 14,027 12,848 1,067 853 2,470 2,138 18,947 16,892 INVESTMENT PRODUCTS - FUNDS UNDER MANAGEMENT * 2006 1 Jan 2006 Gross Redemptions Market and 31 Dec 2006 inflows other movements £m £m £m £m £mUK Operations 36,196 13,486 (7,385) 2,649 44,946Asian Operations 10,132 20,408 (17,876) (411) 12,253Group Total 46,328 33,894 (25,261) 2,238 57,199 1 Jan 2005 Gross Redemptions Market and 31 Dec 2005 inflows other movements2005 £m £m £m £m £mUK Operations 28,705 7,916 (4,054) 3,629 36,196Asian Operations 8,538 18,457 (17,130) 267 10,132Group Total 37,243 26,373 (21,184) 3,896 46,328 * The format of the tables shown above is consistent with the distinctionbetween insurance and investment products as applied for previous financialreporting periods. Products categorised as "insurance" refer to thoseclassified as contracts of long-term insurance business for regulatory reportingpurposes, i.e. falling within one of the classes of insurance specified in partII of Schedule 1 to the Regulated Activities Order under FSA regulations. Annual premium and contribution equivalents are calculated as the aggregate ofregular new business amounts and one tenth of single new business amounts. The tables shown above are provided as an indicative volume measure oftransactions undertaken in the reporting period that have the potential togenerate profits for shareholders. The amounts shown are not, and not intendedto be, reflective of premium income recorded in the IFRS income statement. The tables above include a bulk annuity transaction with the Scottish AmicableInsurance Fund (SAIF) with a premium of £560m. The transaction reflects thearrangement entered into in June 2006 for the reinsurance of non-profitimmediate pension annuity liabilities of SAIF to Prudential Retirement IncomeLimited (PRIL), a shareholder owned subsidiary of the Group. SAIF is a closedring-fenced sub-fund of the PAC long-term fund established by a Court approvedScheme of Arrangement in October 1997, which is solely for the benefit of SAIFpolicyholders. Shareholders have no interest in the profits of this fund,although they are entitled to investment management fees on this business.Accordingly, it is not part of covered business for EEV reporting purposes. Theinclusion of the transaction between SAIF and PRIL as new business in the tablesabove reflects the transfer from SAIF to Prudential shareholders' funds oflongevity risk, the requirement to set aside supporting capital and theentitlement to surpluses arising on this block of business from the reinsurancearrangement. Consistent with the transfer from uncovered to covered business and reflectingthe transfers above, the transaction has been accounted for as new business forEEV basis reporting purposes. The details shown above for insurance products include contributions forcontracts that are classified under IFRS 4 "Insurance Contracts" as notcontaining significant insurance risk. These products are described asinvestment contracts or other financial instruments under IFRS. Contractsincluded in this category are primarily certain unit-linked and similarcontracts written in UK Insurance Operations and Guaranteed Investment Contractsand similar funding agreements written in US Operations. New business premiums for regular premium products are shown on an annualisedbasis. Department of Work and Pensions rebate business is classified as singlerecurrent business. Internal vesting business is classified as new businesswhere the contracts include an open market option. UK and Asian investment products referred to in the table for funds undermanagement above are unit trusts, mutual funds and similar types of retail fundmanagement arrangements. These are unrelated to insurance products that areclassified as "investment contracts" under IFRS 4, as described in the precedingparagraph, although similar IFRS recognition and measurement principles apply tothe acquisition costs and fees attaching to this type of business. USinvestment products are no longer included in the table above as they are assetsunder administration rather than funds under management. In previous periods new business premiums for intermediated distribution of UKInsurance Operations have included Department of Work and Pensions (DWP) rebatebusiness for SAIF. As shareholders have no interest in SAIF, these are nowexcluded from the table above with comparatives restated accordingly. Theamounts of new SAIF DWP rebate business written were £60m for 2006 and £83m for2005. EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS OPERATING PROFIT FROM CONTINUING OPERATIONS BASED ON LONGER-TERM INVESTMENTRETURNS* Results Analysis by Business Area 2006 2005 £m £mUK OperationsNew business 266 243 Business in force 420 183 Long-term business 686 426 M&G 204 163 Egg (145) 44 Total 745 633 US OperationsNew business 259 211 Business in force 449 530 Long-term business 708 741 Broker-dealer and fund management 18 24 Curian (8) (10) Total 718 755 Asian OperationsNew business 514 413 Business in force 315 163 Long-term business 829 576 Fund management 50 12 Development expenses (15) (20) Total 864 568 Other Income and ExpenditureInvestment return and other income 8 42 Interest payable on core structural borrowings (177) (175)Corporate expenditure:Group Head Office (83) (70)Asia Regional Head Office (36) (30)Charge for share-based payments for Prudential schemes (10) (11) Total (298) (244) UK restructuring costs (53) - Operating profit from continuing operations based on longer-term investment returns 1,976 1,712 Analysed as profits (losses) from:New business 1,039 867 Business in force 1,184 876 Long-term business 2,223 1,743 Asia development expenses (15) (20)Other operating results (179) (11)UK restructuring costs (53) - Total 1,976 1,712 * EEV basis operating profit from continuing operations based on longer-terminvestment returns excludes goodwill impairment charges, short-term fluctuationsin investment returns, the mark to market value movements on core borrowings,the shareholders' share of actuarial and other gains and losses on definedbenefit pension schemes, the effect of changes in economic assumptions andchanges in the time value of cost of options and guarantees caused by economicfactors. The amounts for these items are included in total EEV profit. Thedirectors believe that operating profit, as adjusted for these items, betterreflects underlying performance. Profit on ordinary activities and basicearnings per share include these items together with actual investment returns.This basis of presentation has been adopted consistently throughout thispreliminary announcement. EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS MOVEMENT IN SHAREHOLDERS' CAPITAL AND RESERVES (excluding minority interests) 2006 2005 £m £mProfit for the year attributable to equity holders of the Company 2,212 1,582 Items recognised directly in equity: Cumulative effect of changes in accounting policies on adoption of IAS - (25)32, IAS 39 and IFRS 4, net of related tax, at 1 January 2005 Unrealised valuation movements on Egg securities classified as (2) (1)available-for-sale Movement on cash flow hedges 7 (4)Exchange movements (359) 377 Related tax (74) 65 Dividends (399) (380)Acquisition of Egg minority interests (167) - New share capital subscribed 336 55 Reserve movements in respect of share-based payments 15 15 Treasury shares: Movement in own shares in respect of share-based payment plans 6 0 Movement in Prudential plc shares purchased by unit trusts consolidated 0 3 under IFRS Cumulative adjustment at 31 December 2006 net of related tax, for Jackson 7 - National Life assets backing surplus and required capital (note 8) Net increase in shareholders' capital and reserves 1,582 1,687 Shareholders' capital and reserves at beginning of year (excluding 10,301 8,614 minority interests) Shareholders' capital and reserves at end of year (excluding minority 11,883 10,301 interests) Comprising: UK Operations: Long-term business 5,813 5,132 M&G: Net assets 230 245 Acquired goodwill 1,153 1,153 Egg 292 303 7,488 6,833 US Operations 3,360 3,418 Asian Operations: Net assets 2,637 2,070 Acquired goodwill 172 172 Other Operations: Holding company net borrowings (at market value) (1,542) (1,724)Other net liabilities (232) (468) Shareholders' capital and reserves at end of year (excluding minority 11,883 10,301 interests) EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS SUMMARISED CONSOLIDATED BALANCE SHEET 2006 2005 £m £mTotal assets less liabilities, excluding insurance funds 183,130 174,231 Less insurance funds*: Policyholder liabilities (net of reinsurers' share) and unallocated (177,642) (169,037)surplus of with-profits funds Less shareholders' accrued interest in the long-term business 6,395 5,107 (171,247) (163,930) Total net assets 11,883 10,301 Share capital 122 119 Share premium 1,822 1,564 Statutory basis shareholders' reserves 3,544 3,511 Additional EEV basis retained profit 6,395 5,107 Shareholders' capital and reserves (excluding minority interests) 11,883 10,301 * Including liabilities in respect of insurance products classified asinvestment products under IFRS 4. NET ASSET VALUE PER SHARE (in pence) 2006 2005Based on EEV basis shareholders' funds of £11,883m (£10,301m) 486p 432pNumber of shares issued at year end (millions) 2,444 2,387 EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS NOTES ON THE EEV BASIS RESULTS (1) Basis of preparation of results The EEV basis results have been prepared in accordance with the EEV Principlesissued by the CFO Forum of European Insurance Companies in May 2004 and expandedby the Additional Guidance on EEV Disclosures published in October 2005. Whereappropriate the EEV basis results include the effects of adoption ofInternational Financial Reporting Standards (IFRS). The EEV results for the Group are prepared for 'covered business', as defined bythe EEV Principles. Covered business represents the Group's long-term insurancebusiness for which the value of new and in-force contracts is attributable toshareholders. The EEV basis results for the Group's covered business are thencombined with the IFRS basis results of the Group's other operations. The definition of long-term business operations is consistent with previouspractice and comprises those contracts falling under the definition of long-terminsurance business for regulatory purposes together with, for US Operations,contracts that are in substance the same as guaranteed investment contracts(GICs) but do not fall within the technical definition. Under the EEVPrinciples, the results for covered business incorporate the projected marginsof attaching internal fund management. With two principal exceptions, covered business comprises the Group's long-termbusiness operations. The principal exceptions are for the closed ScottishAmicable Insurance Fund (SAIF) and for the presentational treatment of thefinancial position of two of the Group's defined benefit pension schemes. A verysmall amount of UK group pensions business is also not modelled for EEVreporting purposes. SAIF is a ring-fenced sub-fund of the PAC long-term fund, established by a Courtapproved Scheme of Arrangement in October 1997. SAIF is closed to new businessand the assets and liabilities of the fund are wholly attributable to thepolicyholders of the fund. In 2006, a bulk annuity arrangement between SAIF andPrudential Retirement Income Limited (PRIL), a shareholder-owned subsidiary tookplace, as explained in note 5. Reflecting the altered economic interest fromSAIF policyholders to Prudential shareholders, this arrangement represents atransfer from business of the Group that is not 'covered' to business that is'covered' with consequential effect on the EEV basis results. As regards the Group's defined benefit pension schemes, the surplus or deficitattaching to the Prudential Staff Pension Scheme (PSPS) and Scottish AmicablePension scheme are excluded from the value of UK Operations and included in thetotal for Other Operations. The surplus and deficit amounts are partiallyattributable to the Prudential Assurance Company (PAC) with-profits fund andshareholder-backed long-term business and partially to other parts of the Group.In addition to the IFRS surplus or deficit, the shareholders' 10 per cent shareof the PAC with-profits sub-fund's interest in the movement on the financialposition of the schemes is recognised for EEV reporting purposes. The directors are responsible for the preparation of the supplementaryinformation in accordance with the EEV Principles. The EEV basis results for 2006 and 2005 have been derived from the EEV basisresults supplement to the Company's statutory accounts for 2006. The supplementincluded an unqualified audit report from the auditors. (2) Economic assumptions Deterministic In most countries, the long-term expected rates of return on investments andrisk discount rates are set by reference to period end rates of return on cashor fixed interest securities. This 'active' basis of assumption setting has beenapplied in preparing the results of all the Group's UK and US long-term businessoperations. For the Group's Asian Operations, the active basis is appropriatefor business written in Japan, Korea and US dollar denominated business writtenin Hong Kong. An exception to this general rule is that for countries where long-term fixedinterest markets are less established, investment return assumptions and riskdiscount rates are based on an assessment of longer-term economic conditions.Except for the countries listed above, this basis is appropriate for the Group'sAsian operations. Expected returns on equity and property asset classes are derived by adding arisk premium, also based on the long-term view of Prudential's economists inrespect of each territory, to the risk-free rate. In the UK the equity riskpremium is 4.0 per cent (2005: 4.0 per cent) above risk-free rates. The equityrisk premium in the US is 4.0 per cent (2005: 4.0 per cent). In Asia, equityrisk premiums range from 3.0 per cent to 5.8 per cent (2005: 3.0 per cent to5.75 per cent). Best estimate assumptions for other asset classes, such ascorporate bond spreads, are set consistently. Assumed investment returns reflect the expected future returns on the assetsheld and allocated to the covered business at the valuation date. The table below summarises the principal financial assumptions: 2006 2005 % %UK Insurance Operations Risk discount rate: New business 7.8 7.55In force 8.0 7.7Pre-tax expected long-term nominal rates of investment return: UK equities 8.6 8.1Overseas equities 8.6 to 9.3 8.1 to 8.75Property 7.1 6.4Gilts 4.6 4.1Corporate bonds 5.3 4.9Expected long-term rate of inflation 3.1 2.9Post-tax expected long-term nominal rate of return for the with-profits fund: Pension business (where no tax applies) 7.5 7.1Life business 6.6 6.3 US Operations (Jackson National Life) Risk discount rate: New business 7.6 6.9In force 6.7 6.1Expected long-term spread between earned rate and rate credited to 1.75 1.75policyholders for single premium deferred annuity business US 10 year treasury bond rate at end of period 4.8 4.4Pre-tax expected long-term nominal rate of return for US equities 8.8 8.4Expected long-term rate of inflation 2.5 2.4 Asian Operations China Hong India Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand Vietnam Kong (notes (notes (notes iv, v) (notes ii, v) iii, iv, iv, v) v) 31 31 Dec 31 31 Dec 31 31 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec Dec Dec Dec Dec 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 % % % % % % % % % % % %Risk discount rate: New business 12.0 6.6 16.5 17.5 5.3 9.5 9.5 16.5 6.9 8.8 13.75 16.5In force 12.0 6.8 16.5 17.5 5.3 9.5 9.2 16.5 6.9 9.3 13.75 16.5Expected 4.0 2.25 5.5 6.5 0.0 2.75 3.0 5.5 1.75 2.25 3.75 5.5long-term rate of inflation Government 9.0 4.7 10.5 11.5 2.1 5.0 7.0 10.5 4.5 5.5 7.75 10.5bond yield China Hong India Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand Vietnam Kong (notes (notes (notes (notes iv, v) iv, v) ii, v) iii, iv, v) 31 31 Dec 31 31 Dec 31 31 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec Dec Dec Dec Dec 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 % % % % % % % % % % % %Risk discount rate: New business 12.0 5.9 16.5 17.5 5.0 10.3 9.4 16.5 6.7 9.0 13.75 16.5In force 12.0 6.15 16.5 17.5 5.0 10.3 9.0 16.5 6.8 9.4 13.75 16.5Expected 4.0 2.25 5.5 6.5 0.0 2.75 3.0 5.5 1.75 2.25 3.75 5.5long-term rate of inflation Government 9.0 4.8 10.5 11.5 1.8 5.8 7.0 10.5 4.5 5.5 7.75 10.5bond yield Asia total Asia total 31 Dec 2006 31 Dec 2005 % %Weighted risk discount rate (note i) New business 9.8 9.8In force 8.8 8.4 Notes (i) The weighted discount rates for the Asian operations shown above havebeen determined by weighting each country's discount rates by reference to theEEV basis operating result for new business and the closing value of in-forcebusiness. (ii) For traditional business in Taiwan, the economic scenarios used tocalculate the 2006 and 2005 EEV basis results reflect the assumption of a phasedprogression of the bond yields from the current rates applying to the assetsheld to the long-term expected rates. The projections assume that in the average scenario, the current bond yields ofaround 2 per cent trend towards 5.5 per cent at 31 December 2013 (2005: 2 percent trend towards 5.5 per cent at 31 December 2012). In projecting forward the Fund Earned Rate allowance is made for the mix ofassets in the fund, future investment strategy, and further market valuedepreciation of bonds held as a result of assumed future yield increases. Thesefactors, together with the assumption of the phased progression in bond yieldsgive rise to an average assumed Fund Earned Rate that trends from 2.1 per centfor 2006 to 5.7 per cent in 2014. The assumed Fund Earned Rate falls to 1.4 percent in 2007 and remains below 2.1 per cent for a further five years. Thisfeature is due to the depreciation of bond values as yields rise. Thereafter,the assumed Fund Earned Rate fluctuates around a target of 5.9 per cent. Thisprojection compares with that applied for the 2005 results of a grading from anassumed rate of 2.3 per cent for 2005 to 5.4 per cent for 2013. Consistent withthe EEV methodology applied, a constant discount rate has been applied to theprojected cashflows. (iii) The assumptions shown are for US dollar denominated business whichcomprises the larger proportion of the in-force Hong Kong business. (iv) Assumed equity returns The most significant equity holdings in the Asian operations are in Hong Kong,Singapore and Malaysia. The mean equity return assumptions for those territoriesat 31 December 2006 were 8.7 per cent (31 December 2005: 8.6 per cent), 9.3 percent (31 December 2005: 9.3 per cent) and 12.8 per cent (31 December 2005: 12.8per cent) respectively. To obtain the mean, an average over all simulations ofthe accumulated return at the end of the projection period is calculated. Theannual average return is then calculated by taking the root of the averageaccumulated return minus 1. (v) For Singapore, Malaysia, Taiwan and Hong Kong, cash rates are used insetting the risk discount rates. Stochastic The economic assumptions used for the stochastic calculations are consistentwith those used for the deterministic calculations described above. Assumptionsspecific to the stochastic calculations such as the volatilities of assetreturns reflect local market conditions and are based on a combination of actualmarket data, historic market data and an assessment of longer-term economicconditions. Common principles have been adopted across the Group for thestochastic asset models, for example, separate modelling of individual assetclasses but with allowance for correlation between the various asset classes. Details are given below of the key characteristics and calibrations of eachmodel. UK Insurance Operations • Interest rates are projected using a two-factor model calibrated toactual market data; • The risk premium on equity assets is assumed to follow a log-normaldistribution; • The corporate bond return is calculated as the return on azero-coupon bond plus a spread. The spread process is a mean revertingstochastic process; and • Property returns are modelled in a similar fashion to corporatebonds, namely as the return on a riskless bond, plus a risk premium, plus aprocess representative of the change in residual values and the change in valueof the call option on rents. The rates to which the model has been calibrated are set out below. Mean returns have been derived as the annualised arithmetic average returnacross all simulations and durations. Standard deviations have been calculated by taking the annualised variance ofthe returns over all the simulations, taking the square root and averaging overall durations in the projection. For bonds the standard deviations relate to theyields on bonds of the average portfolio duration. For equity and property, theyrelate to the total return on these assets. The standard deviations applied toboth years presented in these statements are as follows: % Government bond yield 2.0 Corporate bond yield 5.5 Equities: UK 18.0 Overseas 16.0 Property 15.0 Jackson National Life • Interest rates are projected using a log-normal generator calibratedto actual market data; • Corporate bond returns are based on Treasury securities plus aspread that has been calibrated to current market conditions and varies bycredit quality; and • Variable annuity equity and bond returns have been stochasticallygenerated using a regime-switching log-normal model with parameters determinedby reference to historical data. The volatility of equity fund returns rangesfrom 18.6 per cent to 28.1 per cent (2005: 18.6 per cent to 28.1 per cent),depending on risk class, and the volatility of bond funds ranges from 1.4 percent to 2.0 per cent (2005: 1.4 per cent to 1.8 per cent). Asian Operations The same asset return model, as used in the UK, appropriately calibrated, hasbeen used for the Asian operations. The principal asset classes are governmentand corporate bonds. Equity holdings are much lower than in the UK whilstproperty is not held as an investment asset. The stochastic cost of guarantees is only of significance for the Hong Kong,Singapore, Malaysia and Taiwan operations. The mean stochastic returns are consistent with the mean deterministic returnsfor each country. The volatility of equity returns ranges from 18 per cent to 25per cent (2005: 18 per cent to 26 per cent), and the volatility of governmentbond yields ranges from 1.4 per cent to 2.5 per cent (2005: 1.3 per cent to 2.2per cent). (3) Level of encumbered capital In adopting the EEV Principles, Prudential has based encumbered capital on itsinternal targets for economic capital subject to it being at least the localstatutory minimum requirements. Economic capital is assessed using internalmodels, but when applying the EEV principals Prudential does not take credit forthe significant diversification benefits that exist within the Group. Forwith-profits business written in a segregated life fund, as is the case in theUK and Asia, the capital available in the fund is sufficient to meet theencumbered capital requirements. The table below summarises the levels of encumbered capital as a percentage ofthe relevant statutory requirement. Capital as a percentage of relevant statutory requirement UK Insurance Operations 100% of EU MinimumJackson National Life 235% of Company Action LevelAsian Operations 100% of Financial Conglomerates Directive requirement (4) Margins on new business premiums and contributions 2006 New Business Annual Present Pre-Tax New New Business Premiums Premium and value of Business Margin Contribution New Equivalents Business Premiums Single Regular (APE) (PVNBP) Contribution (APE) (PVNBP) £m £m £m £m £m % %UK Insurance Operations 6,991 201 900 7,712 266 30 3.4Jackson National Life 5,964 17 614 6,103 259 42 4.2Asian Operations 1,072 849 956 5,132 514 54 10.0Total 14,027 1,067 2,470 18,947 1,039 42 5.5 2005 New Business Annual Present Pre-Tax New New Business Premiums Premium and value of Business Margin Contribution New Equivalents Business Premiums Single Regular (APE) (PVNBP) Contribution (APE) (PVNBP) £m £m £m £m £m % %UK Insurance Operations 7,002 191 892 7,718 243 27 3.1Jackson National Life 5,009 14 515 5,135 211 41 4.1Asian Operations 837 648 731 4,039 413 56 10.2Total 12,848 853 2,138 16,892 867 41 5.1 New business margins are shown on two bases, namely the margins by reference toAnnual Premium and Contribution Equivalents (APE) and the Present Value of NewBusiness Premiums (PVNBP). APEs are calculated as the aggregate of regular newbusiness amounts and one-tenth of single new business amounts. PVNBPs arecalculated as equalling single premiums plus the present value of expected newbusiness premiums of regular premium business, allowing for lapses and otherassumptions made in determining the EEV new business contribution. The table of new business premiums and margins above excludes SAIF DWP rebatepremiums. Comparatives for premiums for this business, which were previouslyincluded in the totals have been restated. In determining the EEV basis value of new business written in the year thepolicies incept, premiums are included in projected cash flows on the same basisof distinguishing annual and single premium business as set out for statutorybasis reporting. New business contributions represent profits determined by applying the economicand non-economic assumptions applying at the end of the reporting period. (5) Bulk annuity reinsurance from the Scottish Amicable Insurance Fund toPrudential Retirement Income Limited In June 2006 Prudential Retirement Income Limited (PRIL), a shareholder-backedsubsidiary of the Company, entered into a bulk annuity reinsurance arrangementwith the Scottish Amicable Insurance Fund (SAIF) for the reinsurance ofnon-profit immediate pension annuity liabilities with a premium of £560m. SAIFis a closed ring-fenced sub-fund of the PAC long-term fund, which is solely forthe benefit of SAIF policyholders. Shareholders have no interest in the profitsof this sub-fund and, accordingly, it is not part of covered business for EEVreporting purposes. Consistent with the transfer from uncovered to covered business and reflectingthe transfer of longevity risk, requirement for capital support, and entitlementto surpluses on this block of business from SAIF to Prudential shareholders, thetransaction has been accounted for as new business for EEV basis reportingpurposes. (6) UK restructuring costs The charge of £53m for restructuring costs comprises £50m recognised on the IFRSbasis and an additional £3m recognised on the EEV basis for the shareholders'share of costs incurred by the PAC with-profits sub-fund. The costs relate tothe initiative announced in December 2005 for UK Insurance Operations to workmore closely with Egg and M&G. (7) UK Insurance Operations expense assumptions The 2005 EEV basis financial statements included note disclosure explaining thatin determining the appropriate expense assumptions for 2005 account had beentaken of the cost synergies that were expected to arise with some certainty fromthe initiative announced in December 2005 from UK Insurance Operations workingmore closely with Egg and M&G. Without this factor there would have been acharge for altered expense assumptions of approximately £55m. The half year 2006EEV basis results were prepared on the same basis. The initiative was expected to provide annual savings to the cost base of UKOperations in aggregate of £40m. In addition, at the interim results stage, itwas announced that an end to end review of the UK business, with the aim ofreducing the overall cost base was underway. Total UK annual savings, includingthe £40m mentioned above, were noted as being expected to be £150m per annumcomprising £100m for Egg and shareholder-backed business of UK InsuranceOperations and £50m attaching to the with-profits sub-fund. The savings for theUK Insurance Operations cover both acquisition and renewal activity. Reflectingthe underlying trend in unit costs, the interim results announcement noted thatthe element of the additional savings of £110m that relate to long-term businesswas expected to be neutral in its effect on EEV basis results. With the agreement to sell Egg Banking Plc, the actions necessary to implementthese plans have been reassessed and additional initiatives put in place, asannounced on 15 March 2007. In preparing the 2006 EEV basis results for UK Insurance Operations, account hasbeen taken of the expense savings that are expected to arise from theseinitiatives. Without this factor the effect on the 2006 results would have beenan additional charge of £44m for the net effect of revised assumptions in linewith 2006 unit costs. The size of this change reflects the lagged effect of theimplementation of the previously announced initiatives which have affectedrun-rate savings as at 31 December 2006 but not translated to the same extent inunit costs over 2006 as a whole. (8) Cumulative adjustment at 31 December 2006 for Jackson National life(JNL) assets backing surplus and required capital Previously the valuation placed on the JNL assets backing surplus and requiredcapital reflected the fact that generally they are held for the longer-term andexcluded the short-term differences between market value and amortised cost. Forthe balance sheet at 31 December 2006 and prospectively these short-term valueadjustments are incorporated. At 31 December 2006 the balance sheet adjustment,net of related tax is an increase of £7m. For 31 December 2005 the adjustment,if it had been booked at that date, was an increase of £19m. Future movementsfor this item, consistent with the basis applied under IFRS foravailable-for-sale securities, will be booked in the statement of movement inshareholders' capital and reserves. (9) Taiwan - effect of altered economic assumptions and sensitivity ofresults to future market conditions In 2006, as explained in note 2, the expected long-term bond yield has beenmaintained at 5.5 per cent. However, the date at which the expected long-termyield is projected to be attained has been altered from 31 December 2012, asapplied for the 2005 results, to 31 December 2013. This change of assumptiontogether with the associated effect of the resulting change on the economiccapital requirement has given rise to a pre-tax charge of £101m. The sensitivity of the embedded value at 31 December 2006 of the Taiwanoperation to altered economic assumptions and future market conditions to: (a) A 1 per cent increase or decrease in the projected long-term bondyield, (including all consequential changes to investment returns for allclasses, market values of fixed interest assets and risk discount rates), is£107m and £(165)m respectively (31 December 2005: £106m and £(174)mrespectively); and (b) A 1 per cent increase or decrease in the starting bond rate for theprogression to the assumed long-term rate is £116m and £(125)m respectively (31December 2005: £104m and £(108)m respectively). If a delay of a further year to 31 December 2014 for the start and end of theprogression period had been assumed in preparing the 2006 results, there wouldhave been an additional charge of £(88)m. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS CONSOLIDATED INCOME STATEMENT 2006 2005 £m £m Gross premiums earned 16,157 15,225 Outward reinsurance premiums (171) (197)Earned premiums, net of reinsurance 15,986 15,028 Investment income 17,904 24,013 Other income 2,055 2,084 Total revenue, net of reinsurance (note B) 35,945 41,125 Benefits and claims and movement in unallocated surplus of (28,421) (33,100)with-profits funds Acquisition costs and other operating expenditure (5,243) (5,552) Finance costs: interest on core structural borrowings of (210) (208)shareholder-financed operations Goodwill impairment charge - (120)Total charges (note B) (33,874) (38,980) Profit before tax* (note B) 2,071 2,145 Tax attributable to policyholders' returns (849) (1,147)Profit before tax attributable to shareholders (note C) 1,222 998 Tax expense (note E) (1,196) (1,388)Less: tax attributable to policyholders' returns 849 1,147 Tax attributable to shareholders' profit (note E) (347) (241) Profit from continuing operations after tax 875 757 Discontinued operations (net of tax) - 3 Profit for the year 875 760 Attributable to: Equity holders of the Company 874 748 Minority interests 1 12 Profit for the year 875 760 Earnings per share (in pence) 2006 2005 Basic (based on 2,413m and 2,365m shares respectively): Based on profit from continuing operations attributable to the 36.2p 31.5pequity holders of the Company (note F) Based on profit from discontinued operations attributable to the - 0.1pequity holders of the Company 36.2p 31.6p Diluted (based on 2,416m and 2,369m shares respectively): Based on profit from continuing operations attributable to the 36.2p 31.5pequity holders of the Company Based on profit from discontinued operations attributable to the - 0.1pequity holders of the Company 36.2p 31.6p Dividends per share (in pence) 2006 2005Dividends relating to reporting period: Interim dividend (2006 and 2005) 5.42p 5.30pFinal dividend (2006 and 2005) (note G) 11.72p 11.02pTotal 17.14p 16.32pDividends declared and paid in reporting period: Current year interim dividend 5.42p 5.30pFinal dividend for prior year 11.02p 10.65pTotal 16.44p 15.95p * Profit before tax represents income net of post-tax transfers to unallocatedsurplus of with-profits funds, before tax attributable to policyholders andunallocated surplus of with-profits funds, unit-linked policies andshareholders' profits. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 2006 Share Share Retained Trans- Avail- Hedging Share- Minority Total capital premium earnings lation able- reserve holders' interests equity reserve for- equity sale secur- ities reserve £m £m £m £m £m £m £m £m £mReserves Profit for the year 874 874 1 875 Items recognised directly in equity: Exchange movements (224) (224) (224)Movement on cash flow 7 7 7 hedges Unrealised valuation movements on securities classified as available-for-sale: Unrealised holding losses (210) (210) (210)arising during the year Less losses included in the 7 7 7 income statement Unrealised investment (203) (203) (203)losses, net Related change in 75 75 75 amortisation of deferred income and acquisition costs Related tax (74) 50 (2) (26) (26)Total items recognised (298) (78) 5 (371) (371)directly in equity Total income and expense 874 (298) (78) 5 503 1 504 for the year Dividends (399) (399) (399)Reserve movements in 15 15 15 respect of share-based payments Change in minority 43 43 interests arising principally from purchase and sale of venture investment companies and property partnerships of the PAC with-profits fund and of other investment funds Acquisition of Egg minority (167) (167) (84) (251)interests (note J) Share capital and share premium New share capital 3 333 336 336 subscribed (note H) Transfer to retained (75) 75 earnings in respect of shares issued in lieu of cash dividends (note H) Treasury shares Movement in own shares in 6 6 6 respect of share-based payment plans Movement in Prudential plc 0 0 0 shares purchased by unit trusts consolidated under IFRS Net increase (decrease) in 3 258 404 (298) (78) 5 294 (40) 254 equity At beginning of year 119 1,564 3,236 173 105 (3) 5,194 172 5,366 At end of year 122 1,822 3,640 (125) 27 2 5,488 132 5,620 2005 Share Share Retained Trans- Avail- Hedging Share- Minority Total capital premium earnings lation able- reserve holders' interests equity reserve for- equity sale secur- ities reserve £m £m £m £m £m £m £m £m £mReserves Profit for the year 748 748 12 760 Items recognised directly in equity: Exchange movements 268 268 268 Movement on cash flow (4) (4) 1 (3)hedges Unrealised valuation movements on securities classified as available-for-sale: Unrealised holding losses (773) (773) (773)arising during the year Less losses included in the 22 22 22 income statement Unrealised investment (751) (751) (751)losses, net Related change in 307 307 307 amortisation of deferred income and acquisition costs Related tax 65 152 1 218 218 Total items recognised 333 (292) (3) 38 1 39 directly in equity Total income and expense 748 333 (292) (3) 786 13 799 for the year Cumulative effect of 2 (173) 397 226 (3) 223 changes in accounting policies on adoption of IAS 32, IAS 39 and IFRS 4, net of applicable taxes at 1 January 2005 (note M) Dividends (380) (380) (380)Reserve movements in 15 15 (1) 14 respect of share-based payments Change in minority 26 26 interests arising principally from purchase and sale of venture investment companies and property partnerships of the PAC with-profits fund Share capital and share premium New share capital 0 55 55 55 subscribed Transfer to retained (51) 51 earnings in respect of shares issued in lieu of cash dividends Treasury shares Movement in own shares in 0 0 0 respect of share-based payment plans Movement in Prudential plc 3 3 3 shares purchased by unit trusts consolidated under IFRS Net increase (decrease) in 6 264 333 105 (3) 705 35 740 equity At beginning of year 119 1,558 2,972 (160) 4,489 137 4,626 At end of year 119 1,564 3,236 173 105 (3) 5,194 172 5,366 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS CONSOLIDATED BALANCE SHEET 2006 2005 (note £m N) £mAssets Intangible assets attributable to shareholders: Goodwill 1,341 1,341Deferred acquisition costs and acquired in force value of 2,497 2,405long-term business contracts 3,838 3,746 Intangible assets attributable to PAC with-profits fund (note N): In respect of venture fund investment subsidiaries 830 679Deferred acquisition costs 31 35 861 714Total 4,699 4,460 Other non-investment and non-cash assets: Property, plant and equipment 1,133 910Reinsurers' share of policyholder liabilities 945 1,278Deferred tax assets 1,012 755Current tax recoverable 404 231Accrued investment income 1,900 1,791Other debtors 1,052 1,305Total 6,446 6,270 Investments of long-term business, banking and other operations: Investment properties 14,491 13,180Investments accounted for using the equity method 6 5Financial investments: Loans and receivables 11,573 13,245Equity securities and portfolio holdings in unit trusts 78,892 71,985Debt securities 81,719 82,471Other investments 5,401 3,879Deposits 7,759 7,627Total 199,841 192,392 Held for sale assets 463 728Cash and cash equivalents 5,071 3,586Total assets 216,520 207,436 Equity and liabilities Equity Shareholders' equity (note H) 5,488 5,194Minority interests 132 172Total equity 5,620 5,366 Liabilities Banking customer accounts 5,554 5,830Policyholder liabilities and unallocated surplus of with-profits funds: Insurance contract liabilities 123,213 120,436Investment contract liabilities with discretionary participation 28,733 26,523features Investment contract liabilities without discretionary 13,042 12,026participation features Unallocated surplus of with-profits funds 13,599 11,330 Total 178,587 170,315 Core structural borrowings of shareholder-financed operations: Subordinated debt (other than Egg) 1,538 1,646Other 1,074 1,093 2,612 2,739Egg subordinated debt 451 451Total 3,063 3,190 Other borrowings: Operational borrowings attributable to shareholder-financed 5,609 6,432operations (note I) Borrowings attributable to with-profits funds (note I) 1,776 1,898 Other non-insurance liabilities: Obligations under funding, securities lending and sale and 4,232 4,529repurchase agreements Net asset value attributable to unit holders of consolidated unit 2,476 965trusts and similar funds Current tax liabilities 1,303 962Deferred tax liabilities 3,882 3,077Accruals and deferred income 517 506Other creditors 1,398 1,478Provisions 464 972Other liabilities 1,652 1,770Held for sale liabilities 387 146Total 16,311 14,405Total liabilities 210,900 202,070Total equity and liabilities 216,520 207,436 CONSOLIDATED CASH FLOW STATEMENT 2006 2005 £m £mCash flows from operating activities Profit before tax (note i) 2,071 2,145 Changes in operating assets and liabilities: Investments (13,748) (21,462)Banking customer accounts (276) (861)Other non-investment and non-cash assets (232) (957)Policyholder liabilities (including unallocated surplus) 13,540 21,113 Other liabilities (including operational borrowings) 1,136 180 Interest income and expense and dividend income included in profit (10,056) (8,410)before tax Other non-cash items 198 0 Operating cash items: Interest receipts 6,466 5,946 Dividend receipts 3,633 2,680 Tax paid (523) (573)Net cash flows from operating activities 2,209 (199)Cash flows from investing activities Purchases of property, plant and equipment (174) (160)Proceeds from disposal of property, plant and equipment 34 6 Costs incurred on purchase of Egg minority interests (6) - Acquisition of subsidiaries, net of cash balances (note ii) (70) (68)Disposal of subsidiaries, net of cash balances (note ii) 114 252 Net cash flows from investing activities (102) 30 Cash flows from financing activities Structural borrowings of the Group: Shareholder-financed operations (note iii): Issue - 168 Redemption (1) (308)Interest paid (204) (204)With-profits operations (note iv): Interest paid (9) (9)Equity capital (note v): Issues of ordinary share capital 15 3 Dividends paid to shareholders (323) (328)Net cash flows from financing activities (522) (678) Net increase (decrease) in cash and cash equivalents 1,585 (847)Cash and cash equivalents at beginning of year 3,586 4,341 Effect of exchange rate changes on cash and cash equivalents (100) 92 Cash and cash equivalents at end of year (note vi) 5,071 3,586 Notes (i) Profit before tax represents income, net of post-tax transfers tounallocated surplus of with-profits funds, before tax attributable topolicyholders and unallocated surplus of with-profits funds, unit-linkedpolicies and shareholders' profits. It does not represent profit before taxattributable to shareholders. (ii) Acquisitions and disposals of subsidiaries shown above include ventureinvestment subsidiaries of the PAC with-profits fund as shown in note J. In2005, this also includes the purchase of Life Insurance Company of Georgia. (iii) Structural borrowings of shareholder-financed operations consist ofthe core debt of the parent company and related finance subsidiaries, JacksonNational Life surplus notes and Egg subordinated debt. Core debt excludesborrowings to support short-term fixed income securities programmes andnon-recourse borrowings of investment subsidiaries of shareholder-financedoperations. Cash flows in respect of these borrowings are included within cashflows from operating activities. (iv) Structural borrowings of with-profits operations relate solely to the£100m 8.5 per cent undated subordinated guaranteed bonds which contribute to thesolvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fencedsub-fund of the PAC with-profits fund. Cash flows on other borrowings ofwith-profits funds, which principally relate to venture investment subsidiaries,are included within cash flows from operating activities. (v) Cash movements in respect of equity capital exclude scrip dividends andshare capital issued in respect of the acquisition of Egg minority interests. (vi) Of the cash and cash equivalents amounts reported above, £437m (2005:£263m) represents cash and cash equivalents of the parent company and relatedfinance subsidiaries. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BASIS RESULTS NOTES ON THE STATUTORY IFRS BASIS RESULTS A Basis of preparation and audit status The statutory basis results included in this announcement have been extractedfrom the audited financial statements of the Group for the year ended 31December 2006. These statements have been prepared in accordance withInternational Financial Reporting Standards (IFRS) as adopted by the EuropeanUnion (EU) as required by EU law (IAS Regulation EC1606/2002). The auditors have reported on the 2006 statutory accounts. The financialinformation set out above does not constitute the Company's statutory accountsfor the years ended 31 December 2006 or 2005 but is derived from those accounts.The auditors' report was (i) unqualified, (ii) did not include reference to anymatters to which the auditors drew attention by way of emphasis withoutqualifying their report and (iii) did not contain a statement under section 237(2) or (3) of the Companies Act 1985. In 2005, the Group adopted the amendments to IAS 39, 'The Fair Value Option' andIAS 19, 'Employee Benefits' (as amended in 2004). These amendments weremandatory for accounting periods beginning on or after 1 January 2006. There are no other new or revised accounting standards and interpretationsissued by the International Accounting Standards Board (IASB) or theInternational Financial Reporting Interpretations Committee (IFRIC) of the IASB,effective in 2006, that have an impact on the results of the Group. The following amendments and interpretations to published standards weremandatory for accounting periods beginning on or after 1 January 2006 and arerelevant to the Group's operations but their adoption did not have an impact onthe Group's results: (i) Amendment to IAS 39, 'Cash Flow Hedge Accounting of ForecastIntra-group Transactions'. (ii) Amendment to IAS 39 and IFRS 4, 'Financial Guarantee Contracts'. (iii) Amendments to IAS 21, 'Net Investment in a foreign operation'. B Segment disclosure 2006 2005 £m £mRevenue Long-term business 34,197 39,296 Banking 914 1,115 Broker-dealer and fund management 1,080 895 Unallocated corporate 38 98 Intra-group revenue eliminated on consolidation (284) (279)Total revenue, net of reinsurance, per income statement 35,945 41,125 Charges (before income tax attributable to policyholders and unallocated surplus of long-term insurance funds) Long-term business, including post-tax transfers to unallocated (32,162) (36,997)surplus of with-profits funds Banking (1,064) (1,071)Broker-dealer and fund management (797) (741)Unallocated corporate (135) (450)Intra-group charges eliminated on consolidation 284 279 Total charges per income statement (33,874) (38,980) Segment results - revenue less charges (continuing operations) Long-term business 2,035 2,299 Banking* (150) 44 Broker-dealer and fund management 283 154 Unallocated corporate (97) (352) Profit before tax** 2,071 2,145 Tax attributable to policyholders' returns (849) (1,147)Profit before tax attributable to shareholders 1,222 998 Tax attributable to shareholders' profits (347) (241)Profit from continuing operations after tax 875 757 Segment results - discontinued operations (net of tax) Banking - 3 Profit for the year 875 760 * The segment result for banking represents the operating profit based onlonger-term investment returns net of restructuring costs, and short-termfluctuations in investment returns. ** Profit before tax represents income net of post-tax transfers to unallocatedsurplus of with-profits funds, before tax attributable to policyholders andunallocated surplus of with-profits funds, unit-linked policies andshareholders' profits. C Supplementary analysis of profit from continuing operations before taxattributable to shareholders 2006 2005Results analysis by business area £m £mUK Operations UK Insurance Operations (note D) 500 400 M&G 204 163 Egg (145) 44 Total 559 607 US Operations Jackson National Life (note D) 398 348 Broker-dealer and fund management 18 24 Curian (8) (10)Total 408 362 Asian Operations Long-term business (note D) 189 195 Fund management 50 12 Development expenses (15) (20)Total 224 187 Other Income and Expenditure Investment return and other income 58 87 Interest payable on core structural borrowings (177) (175)Corporate expenditure: Group Head Office (83) (70)Asia Regional Head Office (36) (30)Charge for share-based payments for Prudential schemes (10) (11)Total (248) (199)UK restructuring costs (note L) (50) - Operating profit from continuing operations based on longer-term 893 957 investment returns Goodwill impairment charge (note i) - (120)Short-term fluctuations in investment returns on 162 211 shareholder-backed business (note ii) Shareholders' share of actuarial and other gains and losses on 167 (50)defined benefit pension schemes (note iii) Profit from continuing operations before tax attributable to 1,222 998 shareholders Notes (i) Goodwill impairment charge The charge for goodwill impairment in 2005 relates to the Japanese lifebusiness. (ii) Short-term fluctuations in investment returns on shareholder-backedbusiness 2006 2005 £m £mUS Operations: Movement in market value of derivatives used for economic 34 122 hedging purposes Actual less longer-term investment returns for other items 20 56 Asian Operations 134 32 Other Operations (26) 1 162 211 (iii) Actuarial and other gains and losses on defined benefit pensionschemes 2006 2005 £m £mActuarial gains and losses Actual less expected return on scheme assets 156 544 Experience gains on liabilities 18 1 Gains (losses) on changes of assumptions for scheme 311 (489)liabilities* 485 56 Less: amount attributable to the PAC with-profits fund (318) (58) 167 (2)Non-recurrent credit (charge) Shareholders' share of credit arising from reduction in - 35 assumed level of future discretionary increases for pensions in payment of the Prudential Staff Pension Scheme to 2.5% Loss on re-estimation of shareholders' share of deficit on the - (63)Prudential Staff Pension Scheme at 31 December 2005 to 30% Effect of strengthening in actuarial provisions for increase - (20)in ongoing contributions for future service of active scheme members - (48) 167 (50) * The gains and losses on changes of assumptions for scheme liabilitiesprimarily reflect movements in yields on good quality corporate bonds. Theseyields are used to discount the projected pension scheme benefit payments. The discount rates applied for the Group's UK defined benefit schemes, andreflected in the gains and losses shown above, are as follows: 31 December 2006 5.2% 31 December 2005 4.8% D Effect of changes in assumptions, estimates and bases used to measureinsurance assets and liabilities (a) UK Insurance Operations 2006 In 2006, the FSA made regulatory changes for UK regulated non-participatingbusiness. These changes were proposed in the consultative paper CP 06/16 andconfirmed in December 2006 policy statement PS 06/14. The changes to the FSA rules allow insurance technical provisions to incorporatemore economic realism. In particular this is achieved by; • Setting technical provisions for expenses not directly attributableto one particular contract at a homogenous risk level and not, as previously, atan individual contract level for all non-profit business. • Recognising the economic effect of making a prudent lapse rateassumption. Previously, no lapses were assumed. The effect of this change is accounted for as a change in estimate and there isa consequent increase in operating profit based on longer-term investmentreturns of £46m. In addition, a charge of £4m was recognised in 2006 for the effect of change ofassumption for renewal and termination expenses mainly in respect of PAC. 2005 For shareholder-backed non-participating business a number of changes ofassumptions were made in 2005. Taken together these changes had the effect ofreducing operating profit based on longer-term investment returns beforeshareholder tax by £36m with a consequent increase in liabilities. (b) US Operations 2006 Several assumptions were modified in 2006 to conform to more recent experienceresulting in a net decrease of £7m. These changes included revisions to theassumption regarding utilisation of free partial withdrawal options, resultingin a decrease in deferred acquisition costs of £12m. Other smaller changesincluded changes relating to lapse rates, mortality rates and other assumptions,which resulted in an increase of £6m in deferred acquisition costs. 2005 Several assumptions were modified in 2005 to conform to more recent experienceresulting in a net decrease to pre-tax profits of £7m. The most significantchanges included a write-down of deferred acquisition costs of £21m for SinglePremium Deferred Annuities, partial withdrawal changes and a Universal Life SOP03-1, 'Accounting and Reporting by Insurance Enterprises for CertainNon-traditional Long Duration Contracts and for Separate Accounts' reserveincrease of £13m due to increasing the mortality assumption. Other smallerchanges included changes relating to Single Premium Whole Life surrenders andannuity mortality and annuitisation rates, which resulted in a £19m benefit onadjusting amortisation of deferred acquisition costs. (c) Asian Operations 2006 There are no changes of assumptions that had a material impact on the 2006results of Asian operations. 2005 The 2005 results for Asian operations were affected in two significant ways forchanges of basis or assumption. For the Singapore life business, the adoption of the Singapore risk-basedcapital framework in 2005 resulted in a change of estimate and reduction in theliability of £73m. The second item reflects the application of liability adequacy testing for theTaiwan life business which resulted in a write-off of deferred acquisition costsof £21m in 2005. E Tax charge The total tax charge of £1,196m for 2006 (2005: £1,388m) comprises £653m (2005:£1,119m) UK tax and £543m (2005: £269m) overseas tax. This tax charge comprisestax attributable to policyholders and unallocated surplus of with-profits funds,unit-linked policies and shareholders. The tax charge attributable toshareholders of £347m for 2006 (2005: £241m) comprises £97m (2005: £(21)m) UKtax and £250m (2005: £262m) overseas tax. F Supplementary analysis of earnings per share from continuing operations 2006 2005 £m £m Operating profit based on longer-term investment returns 26.4p 32.2pafter related tax and minority interests Adjustment for goodwill impairment charge - (5.1)pAdjustment from post-tax longer-term investment returns to 5.0p 5.9ppost-tax actual investment returns (after related minority interests) Adjustment for post-tax shareholders' share of actuarial and 4.8p (1.5)pother gains and losses on defined benefit pension schemes Based on profit from continuing operations after tax and 36.2p 31.5pminority interests G Dividend A final dividend of 11.72p per share was proposed by the directors on 14 March2007. This dividend will absorb an estimated £287m of shareholders' funds.Subject to shareholder approval, the dividend will be paid on 22 May 2007 toshareholders on the register at the close of business on 13 April 2007. A scripdividend alternative will be offered to shareholders. H Shareholders' equity 2006 2005 £m £m Share capital 122 119Share premium 1,822 1,564Reserves 3,544 3,511Total 5,488 5,194 I Other borrowings 2006 2005 £m £m Operational borrowings attributable to shareholder-financed operations Borrowings in respect of short-term fixed income securities 2,032 1,472programmes Non-recourse borrowings of investment subsidiaries managed 743 1,085by PPM America Borrowings in respect of banking operations 2,819 3,856Other borrowings 15 19Total 5,609 6,432 Borrowings attributable to with-profits funds Non-recourse borrowings of venture fund investment 926 988subsidiaries of the PAC with-profits fund Structural borrowings (subordinated debt of a subsidiary of 100 100the Scottish Amicable Insurance Fund) Other borrowings (predominantly external funding of 750 810consolidated investment vehicles) Total 1,776 1,898 J Acquisitions and disposals (i) Shareholder acquisitions and disposals In December 2005, the Company announced its intention to acquire the minorityinterests in Egg representing approximately 21.7 per cent of the existing issuedshare capital of Egg. The whole of the minority interests were acquired in thefirst half of 2006. Under the terms of the offer, Egg shareholders received0.2237 new ordinary shares in the Company for each Egg share resulting in theissue of 41.6m new shares in the Company. The Company accounted for the purchase of minority interests using the economicentity method. Accordingly, £167m has been charged to retained earningsrepresenting the difference between the consideration paid (including expenses)of £251m and the share of net assets acquired of £84m. On 29 January 2007, Prudential announced that it had reached agreement with Citito sell Egg for £575m in cash, subject to adjustments to reflect any change innet asset value between 31 December 2006 and completion. The transaction issubject to regulatory approval and is expected to complete by the end of April2007. (ii) PAC with-profits fund acquisitions and disposals of venture fundinvestments subsidiaries In 2006 the PAC with-profits fund acquired three new venture capital holdingsthrough PPM Capital in which the Group is deemed to have a controlling interest,in aggregate with, if applicable, other holdings held by, for example, thePrudential Staff Pension Scheme. These acquisitions were for: • 53 per cent of the voting equity interests of Histoire D'or, ajewellery retail company, in April 2006; • 51 per cent of the voting equity interests of Azzuri Communications,a business IT services company, in June 2006: and • 60 per cent of the voting equity interests of Paramount plc, arestaurant company, in September 2006. The results of the aggregated venture acquisitions in 2006 have been included inthe consolidated financial statements of the Group commencing on the respectivedates of acquisition and contributed a loss of £7.7m within the incomestatement, which is also reflected as part of the movement in unallocatedsurplus of the with-profits fund. The table below identifies the net assets of these acquisitions and minorbusiness purchases by existing venture holdings. This reconciles the net assetsto the consideration paid Fair value on acquisition £m Cash and cash equivalents 18 Other current assets 31 Property, plant and equipment 45 Intangible assets other than goodwill 139 Other non-current assets 100 Less liabilities, including current liabilities and (581)borrowings Net assets acquired (248)Goodwill 336 Cash consideration 88 Aggregate goodwill of £336m has been recognised for the excess of the cost overthe Group's interest in the net fair value of entities' assets. In 2006, Upperpoint Distribution Limited, Taverner Hotel Group Pty Ltd, Orefi,Aperio Group Pty Ltd and BST Safety Textiles Luxemborg S.a.r.l., all venturesubsidiaries of the PAC with-profits fund, were disposed of for cashconsideration of £133m. Goodwill of £46m and cash and cash equivalents of £19mwere disposed of. In addition, one venture subsidiary was classified as held forsale at 31 December 2006. K Bulk annuity reinsurance from the Scottish Amicable Insurance Fund(SAIF) to Prudential Retirement Income Limited (PRIL) In June 2006, PRIL, a shareholder-backed subsidiary of the Group, entered into abulk annuity reinsurance arrangement with SAIF for the reinsurance of non-profitimmediate pension annuity liabilities with a premium of £560m. SAIF is a closedring-fenced sub-fund of the PAC long-term fund, established by a Court approvedScheme of Arrangement in 1997, which is solely for the benefit of SAIFpolicyholders. As explained in the notes to the tables for the supplementarytransaction measure of new business, the economic substance of the arrangementis a transfer of risks and rewards attaching to this business from SAIFpolicyholders to Prudential shareholders. Accordingly, for the purpose of thosetables the reinsurance transaction has been recorded as 'new business'. ForGroup reporting purposes the amounts recorded by SAIF and PRIL for the premiumare eliminated on consolidation. L UK restructuring costs In December 2005, the Group announced an initiative for UK Insurance Operationsto work more closely with Egg and M&G and in the process facilitate therealisation of substantial annualised pre-tax cost savings and opportunities forrevenue synergies. The one-off restructuring cost of achieving the savings wasestimated to be £50m. In the first half of 2006 the level of current and projected restructuringactivity increased as a result of an end to end review of the UK business, thatwas aimed at reducing the overall cost base. The total cost of implementing thisand the previously announced restructuring (as noted above) was estimated at£110m to be incurred in 2006 and 2007, of which £70m was anticipated to be borneby the shareholder-backed UK Insurance Operations and Egg and £40m by the PACwith-profits fund. As at 31 December 2006, £50m of cost attributable to shareholder-backedoperations had been incurred. UK restructuring costs have been incurred as follows: £mUK Insurance Operations 31M&G 2Egg 12Unallocated corporate 5 50 M Effect of adoption of IAS 32, IAS 39, and IFRS 4 The impact on total equity of adopting IAS 32, IAS 39 and IFRS 4 at 1 January2005 was as follows: Shareholders' Minority Total equity interests equity £m £m £mChanges on adoption of IAS 32, IAS 39 and IFRS 4 relating to: UK Insurance Operations (note i) (22) (22)Jackson National Life (note ii) 273 273 Banking and non-insurance operations (note iii) (25) (3) (28)Total 226 (3) 223 Notes The changes shown above reflect the impact of re-measurement for : (i) UK Insurance Operations The reduction in shareholders' equity of £22m includes £20m relating to certainunit-linked and similar contracts that do not contain significant insurance riskand are therefore categorised as investment contracts under IFRS 4. (ii) Jackson National Life Under IAS 39, JNL's debt securities and derivative financial instruments arere-measured to fair value from the lower of amortised cost and, if relevant,impaired value. Fair value movements on debt securities, net of shadow changesto deferred acquisition costs and related deferred tax, are recognised directlyin equity. Fair value movements on derivatives are recorded in the incomestatement. (iii) Banking and non-insurance operations Under IAS 39, for Egg, changes to opening equity at 1 January 2005 arise fromaltered policies for effective interest rate on credit card receivables,impairment losses on loans and advances, fair value adjustments on wholesalefinancial instruments and embedded derivatives in equity savings products. Thenet effect on shareholders' equity of these changes, after tax, is a deductionof £15m. A further £10m reduction in equity arises on fair valuation of certaincentrally held financial instruments and derivatives. N 2005 comparative balance sheet Minor presentational adjustments have been made for refinements to theacquisition accounting for intangible assets of venture investment subsidiariesof the PAC with-profits fund. These adjustments affect the carrying value ofgoodwill and other intangible assets, with minor consequential effects on someother balance sheet categories. Shareholders' profit and equity are unaffectedby these adjustments. O Sensitivity of IFRS basis results for Taiwan life business to economicassumptions and market conditions The in-force business of the Taiwan life operation includes traditional whole oflife policies where the premium rates have been set by the regulator atdifferent points for the industry as a whole. Premium rates were set to give aguaranteed minimum sum assured on death and a guaranteed surrender value onearly surrender based on prevailing interest rates at the time of policy issue.Premium rates also included allowance for mortality and expenses. The requiredrates of guarantee have fallen over time as interest rates have reduced from ahigh of 8 per cent to current levels of around 2 per cent. The current low levelof bond rates in Taiwan gives rise to a negative spread against the majority ofthese policies. The current cash costs of funding in force negative spread inTaiwan is around £40m a year. The profits attaching to these contracts are particularly affected by the ratesof return earned, and estimated to be earned, on the assets held to coverliabilities and on future investment income and contract cash flows. Under IFRS,the insurance contract liabilities of the Taiwan business are determined on theUS GAAP basis as applied previously under UK GAAP. Under this basis the policyliabilities are calculated on sets of assumptions, which are locked in at thepoint of policy inception, and a deferred acquisition cost is held in thebalance sheet. The adequacy of the insurance contract liabilities is tested by reference tobest estimates of expected investment returns on policy cash flows andreinvested income. The assumed earned rates are used to discount the future cashflows. The assumed earned rates consist of a long-term best estimate determinedby consideration of long-term market conditions, and rates assumed to be earnedin the trending period. For 2005, it was projected that rates of return forTaiwanese bond yields would trend from the then current levels of some 2 percent to 5.5 per cent by 31 December 2012. For 2006, it has been assumed that thelong-term bond rate will be attained one year later, i.e. by 31 December 2013. The liability adequacy test results are sensitive to the attainment of thetrended rates during the trending period. Based on the current asset mix,margins in other contracts that are used in the assessment of the liabilityadequacy tests, and currently assumed future rates of return, if interest rateswere to remain at current levels in 2007, and the target date for attainment ofthe long-term bond yield deferred to 31 December 2014, the premium reserve, netof deferred acquisition costs, would be broadly sufficient. If interest rateswere to remain at current levels in 2008 with a further one year delay in theprogression period then some level of write-off of deferred acquisition costsmay be necessary. However, the amount of the charge based on current in-forcebusiness which is estimated at between £70m and £90m, is sensitive for thepreviously mentioned variables. Furthermore, the actual amount of any write-off would be affected by the impactof new business written between 31 December 2006 and the future reporting datesto the extent that the business is taken into account as part of the liabilityadequacy testing calculations for the portfolio of contracts. The adequacy of the liability is also sensitive to the level of the projectedlong-term rate. The current long-term assumption of 5.5 per cent has beendetermined on a prudent best estimate basis by reference to detailed assessmentsof the financial dynamics of the Taiwanese economy. In the event that the rateapplied was altered the carrying value of the deferred acquisition costs andpolicyholder liabilities would be potentially affected. At 31 December 2006, if the assumed long-term bond yield applied had beenreduced by 0.5 per cent from 5.5 per cent to 5.0 per cent and continued to applythe same progression period to 31 December 2013, by assuming bond yieldsincrease from current levels in equal annual instalments to the long-term rate,the premium reserve, net of deferred acquisition costs, would have beeninsufficient and there would have been a charge of some £60m to the incomestatement. The impact of reducing the long-term rate by a further 0.5 per centto 4.5 per cent would have increased this charge by some £160m. The primaryreason for the lower level of charge for the initial 0.5 per cent reduction isthe current level of margins in the liability adequacy calculation. The effectsof additional 0.5 per cent reductions in the assumed long-term rate below 4.5per cent would be of a similar or slightly higher level to the £160m notedpreviously. The effects of changes in any one year reflect the combination of the short-termand long-term factors described above. P Inherited Estate of the PAC long-term fund The assets of the main with-profits fund within the long-term fund of PACcomprise the amounts that it expects to pay out to meet its obligations toexisting policyholders and an additional amount used as working capital. Theamount payable over time to policyholders from the with-profits fund is equal tothe policyholders' accumulated asset shares plus any additional payments thatmay be required by way of smoothing or to meet guarantees. The balance of theassets of the with-profits fund is called the 'inherited estate' and hasaccumulated over many years from various sources. The inherited estate represents the major part of the working capital of PAC'slong-term insurance fund. This enables PAC to support with-profits business byproviding the benefits associated with smoothing and guarantees, by providinginvestment flexibility for the fund's assets, by meeting the regulatory capitalrequirements that demonstrate solvency and by absorbing the costs of significantevents or fundamental changes in its long-term business without affecting thebonus and investment policies. The size of the inherited estate fluctuates fromyear to year depending on the investment return and the extent to which it hasbeen required to meet smoothing costs, guarantees and other events. PAC believes that it would be beneficial if there were greater clarity as to thestatus of the Inherited Estate. As a result, PAC has announced that it has beguna process to determine whether it can achieve that clarity through areattribution of the Inherited Estate. As part of this process a PolicyholderAdvocate has been nominated to represent policyholders' interests. Thisnomination does not mean that a reattribution will occur. Given the size of the Group's with-profits business any proposal is likely to betime consuming and complex to implement and is likely to involve a payment topolicyholders from shareholders funds. If a reattribution is completed theinherited estate will continue to provide working capital for the long-terminsurance fund. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Prudential